The Government is expected to raise around £550 billion in tax revenue this financial year. The Centre for Policy Studies estimates that a mansion tax (of £20,000 on properties of £2 million), would raise at most £1 billion, less than 0.2 per cent of revenue. The tax is, however, likely to weaken the market and reduce prices – reducing receipts from other taxes; so even the CPS’s static analysis is probably optimistic.
This proposed tax would be a huge burden on those forced to pay. The rate is not 1 per cent of the property’s value. The standard lifetime of a lease on a new build is 125 years, over which time the government will have confiscated 125 per cent of the value of a £2 million property. And there will be people who own a £2 million property, but can’t afford the £20,000 a year fee. It would be an ugly political gesture that forced them to sell their homes.
Janan Ganesh, writing in the Financial Times (£), dismissed this concern by arguing that the tax could be taken when the property is sold. But, on top of a seven per cent rate of Stamp Duty, that would be such a huge burden it would freeze the property market. Would anyone downsize if it meant paying a quarter or more of their property’s value in a single cheque to the exchequer?
He also pointed out that there ‘is also such a thing as equity release’. You borrow to pay the tax and pay it off from your estate when you die. This route has been suggested by many without considering the consequences. Equity release borrowing tends to come at a price of about seven per cent a year. We did the sums for the 2020 Tax Commission and found that could mean an effective inheritance tax rate of 75 per cent, with a threshold of zero.
The moral case for this tax seems to be based on an updated form of the old Marxist separation of earned and unearned income. Income is earned if it is a payment for labour and unearned if it is a return from capital. The idea that capital income is ‘unearned’ is beneath contempt. You earn the returns on an investment by working, delaying gratification and saving. The argument that an inheritance is ‘unearned’ (so that we can take what we like in Inheritance Tax) is just as weak: someone earned the money.
This moral case isn’t quite what Tim Montgomerie (£) and some other advocates of the mansion tax are making. They are basically saying that people got lucky in the London market; they don’t deserve the returns on their investment. But you can apply exactly that logic to anyone who bought Apple shares in the secondary market shortly before they announced the iPod. Maybe an Apple Tax is coming next. On the other hand, commercial landlords and many people who own expensive homes in other parts of the country have lost a lot of money on property recently. Will they get a cheque from HMRC?
If the London property market is “rigged”, stop rigging it. We can actually help first time buyers by doing something about restrictions on building new residential property. Like the limitations on replacing low value commercial space with flats. The mansion tax wouldn’t help them.
It is obviously true, as Tim says, that ‘the job of a pro-free market party should not be unquestioningly to defend the interests of the super-rich.’ That is like me starting this article with ‘the job of a conservative intellectual is not to justify Stalinist Communism’. But there are some things which any party that claims to defend the free market cannot do, and a mansion tax is one of them. It could easily end in a wealth tax. After all, how could you justify someone with ten £1.9 million houses paying nothing and someone with one £2 million property paying £20,000 a year? How could you justify someone with £100 million in other assets paying nothing and someone with a single £2 million family home paying £20,000 a year? The list of such questions is endless. And fiscal drag would mean middle class families paying before too long. Just like inheritance tax, just like income tax.
There are much better ways of helping the poor, and far better ways to ensure that you can only get rich through productive work, not exploiting subsidies and regulations. A mansion tax would be a disaster and contribute to the horrible sense that, once again, Britain is not a country in which it is socially acceptable to get rich. That would be terrible news for all of us.
Matthew Sinclair is Director of the Taxpayers’ Alliance.
Picture from the TaxPayers’ Alliance Flickr feed.
More Spectator for less. Stay informed leading up to the EU referendum and in the aftermath. Subscribe and receive 15 issues delivered for just £15, with full web and app access. Join us.